Time to first venture round increasing

Today I read an interesting article about the time it takes angel-backed companies to raise their first venture round, commonly called the series A round. The article, based on Crunchbase data, states that angel-backed companies in 2013 take, on average, 526 days to raise a series A from the date they closed their seed round. This is roughly 90 days longer than the average in 2012, which was 434, so roughly a 3 month difference. Here is the chart. 

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So what does this mean? Well, I think it all boils down to a combination of three things:

1. Series A Crunch - As early as 2011, but particularly over the past year, the phrase ‘series A crunch’ has crept into investors' and journalists' vernacular. Although perhaps overhyped at this point, the problem is real, and there isdata to support it. The series A crunch is the idea that there is a great deal of capital available for seed stage rounds but a relatively small amount of institutional capital available for series A rounds; therefore, many seed-funded companies have a hard time raising series A rounds and eventually run out of money. Because of this, many investors, including our team at Susa Ventures, advise startups to take larger than normal seed rounds in order to increase ‘runway’. Runway is the time (often expressed in months) a startup can operate before needing more capital. By doing this, they give themselves more flexibility and insurance just in case it proves difficult to raise the series A round. So, investors’ advice plays a role in the data above. 

2. More Seed Capital Available - Related to the point above, there is a record breaking amount of seed capital available today. This increases the demand for seed rounds. In past years, a $1M target seed round might only get $1M of interest, but today, it is common for seed rounds to get oversubscribed ($ total committed exceeds what the company wants to raise). What ends up happening is that founders increase the size of the round, to $1.5M for example, thereby extending the runway of the company. When startups have a long period of runway, they typically won’t raise additional capital as quickly, hoping to get further along, and give away less of the company in the next round of financing. So, the ballooning angel investing market plays a role in the above data. 

3. Developer Productivity/Lower Development Costs - Developer productivity has increased 10X in the last 10 years with the introduction of tools such asGitHubAWSStackOverflowParse, among many others. Couple this with the fact that we have more ‘platforms’ today than ever before - mobile platforms such as Android and iOS, data platforms such as Factual, and social platforms such as Facebook or LinkedIn - on which developers can build low cost applications. All this leads to the fact that it is cheaper today than ever to build a company, specifically software based companies. This proliferation of tools, platforms and APIs enabled companies to build and iterate with only seed capital for much longer, theoretically extending the time between the seed and series A rounds. So, increased developer productivity and decreased development costs plays a role in the data above.